Good day, ladies and gentlemen. Welcome to the Allstate Q2 2019 earnings conference call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If any of you require assistance during the program, please press star then zero on your touch-tone telephone. As a reminder, today's program is being recorded. Now I'd like to introduce your host for today's program, Mr. John Griek, Head of Investor Relations. Please go ahead, sir.
Thank you, Jonathan. Good morning. Welcome everyone to Allstate's Q2 2019 earnings conference call. After prepared remarks, we will have a question and answer session. Yesterday, following the close of the market, we issued our news release and investor supplement, filed our 10-Q, and posted today's presentation along with our reinsurance update on our website at allstateinvestors.com. Our management team is here to provide perspective on these results and cover a special topic. Mary Jane Fortin, President of Allstate Financial, will provide an overview of Allstate Annuities and how the business has been substantially reduced in size over the last 13 years. How we have managed the remaining liabilities to maximize shareholder value. The special topic last quarter was about how we match capital to risk at a granular level to ensure we maximize economic returns.
Our first special topic at the beginning of this year was how telematics is being utilized in auto insurance and how Arity, our telematics business, is a leading innovator. As noted on the first slide of the presentation, our discussion will contain non-GAAP measures for which there are reconciliations in the news release and investor supplement. Forward-looking statements about Allstate's operations. Allstate's results may differ materially from these statements, so please refer to our 10-K for 2018 and other public documents for information on potential risks. Now I'll turn it over to Tom.
Good morning. Thank you for joining us to stay current on Allstate. Let's begin on slide two. Allstate's strategy is to protect people from life's uncertainties. The strategic objectives are to grow personal property-liability market share and expand other protection businesses. We start with the upper oval. The personal property-liability market provides consumers protection by ensuring a wide range of assets, automobiles, homes, motorcycles, boats, other personal assets, then their personal liability. We use highly recognized brands, sophisticated pricing, differentiated products, claim expertise, and telematics to deliver unique customer value propositions. We're also building an integrated digital enterprise that will lower costs and better serve customers. As shown in the bottom oval, this strategy also includes providing consumers protection plans, life insurance, voluntary workplace benefits, and identity protection.
We also have a rapidly growing shared economy commercial insurance business that serves ride-sharing companies and our telematics provider Arity. These businesses are enhanced by leveraging our brand, customer base, investment expertise, distribution, claims capabilities, and capital, and it's not just what you see in the oval that's real. For example, we're rebranding SquareTrade products in the U.S. to fully utilize the Allstate name, which both leverages and expands our reach since these products are sold through major retailers. Our claims capabilities are helping us significantly grow the commercial insurance business with the ride-sharing companies. Collectively, the protection businesses in the bottom oval have a tremendous value that can be overlooked by investors who focus only on the property-liability oval. This strategy creates shareholder value through customer satisfaction, unit growth, and attractive returns on capital.
It also ensures we have sustainable profitability in a diversified business platform. Moving to slide three, we had a strong first half of the year. We made progress on all five of our 2019 operating priorities. Revenues exceeded $11 billion, with property-liability premiums up almost half a billion dollars over last year's second quarter. The service businesses revenue was up 26.6% to over $400 million through the three months. Net income was $821 million, and adjusted net income was $2.18 per share, as you can see on the chart on the bottom. As a result of this strong performance, we improved the 2019 property-liability underlying combined ratio outlook by 1.5 points, which is about $500 million of underwriting income better than the original guidance. Adjusted net income return on equity was 13.5% for the last 12 months.
Adjusted net income return on equity is a broad measure of our overall performance since it includes investments, Allstate Life, Allstate Benefits, Allstate Annuities, and the service businesses. Since this represents the returns we generate on all capital, it's the best measure of our operating results. As a result, in 2020, we will establish long-term adjusted net income return on equity targets. Consequently, we will not use the property-liability underlying combined ratio to provide annual guidance on operating results, but we will continue to use it in our dialogue on performance. We're making this change since we're committed to being a leader in the amount and quality of our financial disclosures to enable you to assess our performance and investment potential. Turning to slide four, we made good progress on all five 2019 operating priorities.
The first three, better serve our customers, achieve target economic returns on capital, and grow the customer base, are intertwined to ensure profitable long-term growth. Customers were better served as the enterprise Net Promoter Score improved as a result of that policy renewals increase in the Allstate and Encompass brands, which is a key driver of growth. Although the increases in improvement have slowed. Returns remained strong, which we discussed with all the businesses performing well except one portion of Allstate Annuities, which Mary Jane will cover. In force now exceeds $129 million, an increase of 46.8% compared to the prior year. SquareTrade policies grew to $84 million, reflecting the substantial expansion last August with a large U.S. retailer. Property-liability policies increased by $772,000 from the prior year to $333.6 million, as the Allstate and Esurance brands grew 2.2% and 8.4%, respectively.
Proactive risk and return positioning of the $86 billion investment portfolio resulted in a total return of 7% for the last 12 months and generated $942 million in net investment income for the quarter. Performance-based investment income increased significantly from the first quarter of this year. Shareholder value beyond current earnings is being created through increased telematics usage and greater sophistication at Arity. SquareTrade is expanding into Europe, and InfoArmor's identity protection offerings are being integrated into our strategies. Glenn will now discuss our property and liability results in more detail.
Thanks, Tom. Moving to slide five, you can see that property and liability results remain strong. Net written premium increased 5.9% in the second quarter, or almost $1 billion through the first six months compared to prior year quarter. This reflects policy growth in the Allstate and Esurance brands and higher average premium for auto and homeowners insurance across all three underwritten brands. As you can see in the middle of the left table, total policies in force increased 2.4% to 33.6 million. Moving to the bottom of that table, the property and liability recorded combined ratio of 95.8 was 1.4 points higher than prior year quarter, primarily due to catastrophe losses. This was partially offset by a reduction in operating expenses due to a combination of sustainable operational efficiencies achieved through focused efforts on streamlining processes and automation and lower incentive compensation, given higher growth targets this year.
The underlying combined ratio, which excludes catastrophes and prior year reserve re-estimates, was 84.3 for the first six months of 2019, below the annual guidance, which assumed higher frequency of auto insurance claims. Auto physical damage severities were higher than expected. However, this was offset by planned reduction in expense ratio. As a result of this performance, we're improving the guidance range by 1.5 points to 84.5-86.5 for the full year 2019. This revised range assumes lower auto claims frequency and higher physical damage severity, as well as investments in growth initiatives, the logic of which we'll cover on the next slide. Moving to the right-hand table, Allstate brand auto and homeowners insurance net written premium increased 5% and 6.5% compared to prior year quarter, respectively.
Auto policies in force were up 2.5% over the prior year, and average premium was up 2.7% compared to the prior year quarter. Homeowners policies increased by 1.6%, and average premiums grew by 5.6% over last year. Esurance's auto insurance policy growth was 8.1%, which, combined with average premium increases, resulted in total net written premium growth of 9.6%. Encompass written premium increased 1.1%. A higher average premium more than offset the decline in policy in force. On the bottom of the table, you can see the underlying combined ratios remain strong across our brands. This strong performance means that investment and growth will increase shareholder value. Turning to slide six, investments in profitable growth are focused on Allstate brand property and liability insurance. Attractive margins support investment and growth for five reasons.
First, auto and home insurance generates very attractive returns on capital, as you'll see toward the end of our prepared remarks. Allstate has earned an underwriting profit in auto and home insurance for each of the last eight years, reflecting a focus on profitability, operational excellence, and timely response to external conditions. Current results are strong, with a recorded combined ratio of 93.7 in the Allstate brand over the last 12 months. Allstate has operational strengths, including pricing sophistication, branding, and we've expanded total sales producers by 11% in the past two years. We also have successfully tested different combinations of growth levers in six markets over the last nine months to provide us a roadmap to the best local execution. This comprehensive program is highly targeted by geography, product, and customer segment.
It will use a wide variety of tools, including advertising, customer experience initiatives, pricing sophistication, telematics, and new agency technology. While we're expanding these initiatives, they won't have a significant impact on 2019 policy in force growth. Unit growth is expected to accelerate in 2020 and 2021. This will slightly increase expenses from the current lower levels and have a small impact on combined ratio. This is factored into the improved outlook for underlying combined ratio we just discussed. On a longer-term basis, we're working to reduce other expenses that'll provide us flexibility to positively impact growth and competitive position while maintaining attractive returns. As always, we'll focus on producing strong returns for our shareholders. We'll react quickly to any market conditions as they emerge.
We're building off a position of operational strength to compete both with large, well-known competitors and smaller regional competitors to achieve our strategic objective, which is increasing market share in the personal property and liability market. Mario will now discuss results for service businesses and investments in more detail.
Thanks, Glenn. Let's go to slide seven, which provides detail on our service businesses. Consistent with the strategy to grow non-property liability protection businesses, the service businesses continue to rapidly grow the number of consumers protected, with policies in force increasing 82.8% to 89.7 million. This is largely due to SquareTrade. We will be changing SquareTrade's branding to Allstate for domestic distribution channels, as we believe it increases sales and provides additional brand exposure without advertising investment. As a result of unit growth, revenues grew to $405 million, as you can see from the lower left table. Adjusted net income was $16 million in the quarter, shown on the lower right, a $14 million improvement over the prior year quarter, largely due to improved loss experience at SquareTrade.
We recognized a $55 million pre-tax impairment charge in the second quarter following our decision to phase out domestic use of the SquareTrade brand name. Arity continues to invest in advancing our telematics platform and had a small loss. Total mileage analyzed is now about 14 billion miles per month and captures more than 400 trips per second. Allstate Roadside Services revenue was $73 million for the quarter, with an adjusted net loss of $3 million, slightly better than the prior year quarter. Allstate Dealer Services revenue grew 14% compared to the second quarter of 2018, and adjusted net income was $7 million. InfoArmor had revenues of $23 million, with over 1.2 million policies in force. The adjusted net loss of $6 million was related to growth and integration investments. Slide eight highlights our investment results.
Investment results were also good in the quarter as we were positioning for modest U.S. growth by extending duration on the fixed income portfolio and appropriately matching long-dated liabilities with equity investments, which increased income and valuations. The portfolio generated a strong 7% return over the last 12 months, of which 2.8% was in the second quarter. Net investment income was $942 million, which included a rebound in performance-based results. The components of total return are shown in the chart on the left. The blue bar represents net investment income, which is included in adjusted net income and has varied between 80 and 110 basis points per quarter. Net investment income contributed 3.8% to GAAP total return over the last 12 months, with a stable contribution from interest income on fixed income investments and a more variable contribution from our performance-based portfolio.
Valuations, shown in gray and red, vary on a quarterly basis due to investment market volatility. Since we have ample liquidity, we accept this volatility as it enables us to earn a higher risk-adjusted return. As you can see from the last two bars, portfolio valuations have been up this year, reflecting lower interest rates, tighter corporate credit spreads, and higher equity market valuations. Increases in investment valuations have added 3.2% to our GAAP total return of 7% over the last 12 months. The chart at the right shows net investment income for the second quarter of $942 million, which was $118 million higher than the second quarter of 2018. Market-based investment income, shown in blue, increased to $731 million from $696 million, reflecting investment at higher new purchase yields in 2018 and a duration extension of the property liability fixed income portfolio.
The performance-based portfolio generated investment income of $261 million in the second quarter, which was $85 million higher than the prior year quarter, reflecting strong private equity asset appreciation and gains on the sales of underlying investments. The performance-based portfolio also generated $37 million of realized capital gains comparable with the prior year quarter. Our trailing 12-month performance-based GAAP total return is 9.3%. Now Mary Jane will provide an overview of Allstate Life, Benefits, and Annuities, and the special topic on the annuities business.
Thanks, Mario. Let's turn to slide nine. Allstate Life, shown on the left, generated adjusted net income of $68 million in the second quarter, $12 million lower than the prior year quarter, primarily driven by higher contract benefits. Allstate Benefits adjusted net income, shown in the middle chart, was $37 million in the second quarter, $1 million higher than the prior year quarter, as increased revenue was offset by higher operating costs and expenses. Allstate Annuities, on the right, generated adjusted net income of $52 million in the quarter, which was $8 million higher than the second quarter of 2018 due to increased performance-based investment income. The special topic begins on slide 10. The annuity business grew out of a corporate strategy in the mid-'90s of running into retirement savings businesses such as fixed and variable annuities.
We built a broad-based business that sold a wide range of annuities through six different distribution channels, banks, broker-dealers, Allstate agencies, independent agencies, institutional brokers, and structured settlement brokers. In 2006, we decided to not pursue growth in these areas because we did not have defensible competitive positions. It's a highly competitive market, constrained returns, and with the liability structures that did not properly compensate for risk. As a result, we began a systematic process of exiting these businesses as market conditions permitted. The variable annuity business was reinsured to Prudential in 2006, which enabled us to avoid the downdraft on equity prices that began in 2008. During the financial market crisis, we continued to reduce the size of the business. We exited the broker-dealer and bank distribution channels in 2010.
We stopped issuing structured settlements in 2013, and in 2014, we stopped issuing all remaining annuity products when we sold Lincoln Benefit Life. You can see the impact this had on the balance sheet in the lower chart, where annuity liabilities have been reduced from $75 billion to $18 billion, a 76% decrease. The result is our risk-return profile has significantly improved, and we freed up capital. Allstate Annuities now has two primary sources of income, $7 billion of deferred annuities and $11 billion of long-term immediate annuities. We aggressively manage these businesses to maximize long-term shareholder value, even if this means a negative impact on current accounting returns. We do this in four ways: operational improvements and cost reductions, using a low-risk asset liability management strategy, investing in long-term assets to generate income for long-dated liabilities such as structured settlements, and actively managing capital.
As a result, adjusted net income from the deferred annuities is acceptable, with returns in the low to middle double digits, while the immediate annuities have a low return on capital. Let's go through the four approaches on slide 11, which provides more detail on our multi-faceted approach to improve the long-term economics of this business. We have decreased crediting rates given the declining interest rate environment and contractual features such as maturity dates and limitations on additional deposits have been enforced. Approximately 84% of deferred annuities with declared rate contracts have crediting rates at contractual minimums. Operational enhancements lower costs and reduce risk and include expanded use of offshoring and simplifying administrative processes. We are leveraging the best sources of mortality statistics available to identify deceased annuitants to reduce overpayments.
At the same time, asset liability matching risk has been carefully controlled by positioning the portfolio so it has ample liquidity for the subsequent seven years. Expected cash requirements beyond seven years are invested in performance-based assets to generate attractive risk-adjusted returns for the long-dated structured settlement annuities, some of which are expected to pay out over decades. The risk and return math is laid out in the table in the middle of the slide. The table shows U.S. corporate bonds and U.S. equity returns since 1920 and the volatility of these asset classes over different time periods, which is represented by the standard deviation. Let's start on the top line where you can see in gray that corporate bonds had lower returns on a one-year time horizon than equities, but the volatility has also been much lower.
When you extend the time period to 10 and 20 years, the relative return of bonds remains significantly below that of equity. The volatility converges, which results in a much better risk-adjusted return for equities. As a result, with a long investment horizon, it is a much better choice to be invested in equities if you can handle the interim volatility, which we have done by ensuring we are cash-matched for seven years. This investment strategy, while favorable from an economic perspective, requires additional regulatory capital, which negatively impacts reported financial results. As a result, we actively manage capital to further improve the returns on our annuity business. Today, the NAIC equity investment capital requirements focus on short-term risks of loss, similar to the volatility shown in the one-year column table.
We are leading industry efforts with the NAIC to recognize the long-term risk reduction associated with a more balanced fixed income and performance-based portfolio. Utilizing horizon-based investment risk metrics should right-size regulatory capital requirements. We also continue to review strategic options to reduce exposure and improve returns of the business. Now I'll turn it back over to Mario.
Thanks, Mary Jane. Let's turn to slide 12. We continue to generate attractive returns on capital with adjusted net income return on equity of 13.5% for the 12 months ended June 30th, 2019. The annuity segment, however, generates returns that are below our cost of capital. As you can see from the table on the left, this reduced corporate returns by 3.7 points for the latest 12-month period. When you exclude the impact of annuities, Allstate's adjusted net income return on equity is currently 17.2%. The components of this return are shown on the right. Allstate Protection generates returns in the mid to high teens, depending on the geography and product. Allstate Life has consistent low teens returns. Allstate Benefits is in the mid to high teens. Investments in growth are being made in the service businesses.
Beginning in 2020, Allstate will establish long-term return on equity targets, replacing the focus on annual property-liability underlying combined ratio. This broader and longer-term measure of performance will increase the operating focus on investments, life, benefits, and the service businesses, which in total deploy more than 50% of economic capital when you include the investments backing the property-liability business. Today, some of the non-property-liability businesses, such as Allstate Benefits, SquareTrade, and InfoArmor, get limited focus from the market, despite the fact that they have substantial value. Just the purchase price of SquareTrade and InfoArmor is worth approximately $5.75 per share. This measure also factors in capital management actions, is highly correlated with stock price, and consistent with guidance that our peers provide. Slide 13 highlights the continued strength of our capital position and financial flexibility.
Shareholders' equity of $24.5 billion at the quarter end reflects an increase of $1.35 billion over the second quarter of 2018. Book value per share increased to $67.28 or 13.7% since the second quarter of 2018, reflecting strong income generation and appreciation of the investment portfolio. We returned $664 million to common shareholders in the second quarter of 2019 through a combination of $166 million in common stock dividends and $498 million of share repurchases, which includes the settlement of the accelerated share repurchase program. As of June 30th, there was $1.6 billion remaining on the common share repurchase program. Let's open it up for questions.
Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. We'd also like to ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Gary Ransom from Dowling & Partners. Your question please.
Yes, good morning. I had a question on market conditions. You mentioned in the queue that advertising and insurance has less favorable economics, and I wondered if you could comment on what you're seeing in shopping behavior or volume or conversion that might be causing that.
Gary, this is Tom. Steve may have a point of view here as well. We manage the advertising expenses in a quite granular level, down to whether it's top of the funnel, bottom of the funnel, which state, where we are with pricing, what we're doing with pricing. I don't think you should take away from that comment that we're not interested in growing in insurance, that we don't think we have a competitive product, or that advertising is not working. There's just a small blip down. I think it was down like 4% or something like that.
Yeah, 4%.
Gary, to follow up on that, what we did this year was following what Tom said. We go through our economic model. We look at where we are in terms of the market. Entering the year, we had a few states where we thought we were a little touch and go on the profitability we want to achieve. If you notice in the second quarter in auto, we took some reasonable rates. We took substantially more rates in property also through the first and second quarter. We've got the book, we think, where the profitability going forward looks good to us, and so we think that will be a better opportunity for us to advertise and grow. It never makes sense to spend money in advertising when you think in some of the larger markets, you may be a little bit off the price point.
All right. Yeah, that's helpful. I was wondering if you could comment if you're seeing anything in the Allstate brand as well. I mean, it's different distribution, but is there any trends you're seeing either in shopping behavior or quoting or conversion?
I think if you just, first, Gary, all the industry stuff is somewhat directional, but I don't think it's as specific as what we actually achieve on ourselves. Glenn can talk about where we're growing, and which markets. The market's slightly more competitive because people are doing the logical thing, which is if they are overpriced, and are higher than we are, some of them are coming down. It doesn't mean because the percentage change is negative, that they're still cheaper than us. Really, customers buy in dollars, not in a percentage change. Sometimes they shop based on percentage change. We're seeing there's not been a huge change in shopping behavior since. Glenn, maybe you want to talk about our actual results.
I'll just add, Gary, that we've had good quoting. In fact, our quoting has been favorable to last year. You can see the new business results over a pretty high base year, were up slightly a tenth of a point. We felt good about where we were there. We're seeing still good active movement in the market. As Tom said, you can look at the CPI numbers, and it was near double digits, 18 months ago. Now it's under a point. It's a relatively rate flat environment. There's been some increase in advertising by some of our competitors. That said, we have more points of presence now, up 2,500 points of presence year-over-year. The quoting activity's been good, and we feel good about our ability to compete.
This is a market we're excited about. We think there's an opportunity to grow. That's why Glenn went through the putting more money on there to invest in it. We think this is a great opportunity. We're going to have great returns. Our brand is hunting. Our pricing is good. We're ready to go.
Thank you very much for those answers.
Thank you. Our next question comes from the line of Gregory Peters from Raymond James. Your question please.
Good morning. My first question, I'll focus back on slide 12 of your investor presentation around return on equity. I was hoping maybe you could expand further on how your new approach to guidance might look. One of the concerns or issues that I imagine you're dealing with is the potential changes in the denominator or book value because of the quarterly mark-to-market adjustments for your investment portfolio. Of course, then maybe at the end of next year, you're going to be adjusting book value for the yet-to-be-announced adjustment related to long-duration contracts in your annuity business.
Mario can answer the second piece. Let me just give you an overview. We're doing this because we think it's a better way to talk to you about how we're doing in total. As you said, when you look at just the underlying combined ratio, that becomes the whole focus of the conversation. We end up focusing on an important and significant part of the business, but it's not the whole business. It was perhaps more important when the frequency of auto actions went up in 2015, and people wanted to make sure we were reacting to that. So we've done that. We've been doing it for 13 years. We've always been in there. When you step back, Greg, and look at the impact on stock price, ROE is correlated to stock price. That's the measure we'd like to be held accountable to.
We obviously manage underlying combined ratio, but if you look at underlying combined ratio, we have a very low underlying combined ratio. Other people have a higher underlying combined ratio, yet they have a higher multiple than we do. There's not as good a correlation. It's really about communicating to you all in the broadest way we can. There will obviously be some ups and downs as we deal with different accounting, as the accounting moves to more fair value in the whole balance sheet, so that it bounces around. That's just a math and an explanation issue and conversation we can have with you as to how we're doing and what we're doing. Mario, you might want to talk about the new accounting principle.
Morning, Greg. The first thing I'd say is reiterate what Tom just said at the end, that the ROE guidance we give you will take into account not only the projected profitability of our businesses, but also the denominator to your point, and the amount of capital we have to hold, which will include whatever accounting standards happen to be in place at that time. We're going to factor both into the guidance we give you. In terms of the long-duration accounting standards, we're obviously well aware of it. The initial guidance came out in August. We've been monitoring it ever since. The FASB just this month indicated that they may potentially be deferring implementation by a year or so. It's still a little ways away.
For us, as we've been disclosing for a number of quarters now, the impact will be material in our financial statements. It'll principally impact our annuity segment, and it'll really do it in two ways. The first is through updating assumptions like mortality, morbidity, and lapse assumptions on a regular basis. That'll affect retained earnings when we implement it, and then the ongoing impact will actually affect the income statement. The second part is remeasurement of our liabilities using a more current interest rate as opposed to the assumptions that were put in place at the issuance of the policy. Again, that's going to impact the balance sheet through AOCI. We're focused on it. We're looking at it. When we have something to report, we'll give you more information on that. In the interim, the ROE guidance we give you will factor those kinds of things in.
Great. Thank you for that answer, Tom and Mario. I'd like to pivot for my second question to Glenn's comments around the expense ratio for the Property-Liability business. I noted with interest in your results, really the pretty big improvement in both the Allstate brand expense ratio and the Esurance expense ratio. I think, Glenn, in your prepared comments, you talked about maybe some headwinds or some upward pressure in the back half of the year, maybe you could spend a minute and talk to us more about what you're doing at the organization to drive an improved efficiency in the expense ratio, and what we should be thinking about that trajectory as we look out to 2020 and beyond.
Thanks, Greg. I appreciate the question. I guess I'd reframe headwinds as opportunity because what we're looking to do is invest in and grow the business, which is a great return business. We have made some good structural movement on expenses. To turn that into some real tangible examples for you, operationally, we've done some things like, in automation, we're using aerial imagery and available data in the market instead of going out and inspecting homes from an underwriting standpoint. You can just think about the cost trade-off of doing that. We have improved customer experience by providing better information upfront, a streamlined onboarding process, and as a result, we have a 20% reduction on inquiry calls. That's great for the customer, it costs money to answer the phone, it ends up taking our costs down.
Our procurement team has done a really nice job of leveraging our scale and improving our contracts and what we pay third-party providers. As you mentioned, Esurance's expenses are down, and that's been, as Steve talked about before, some on the marketing and acquisition side of things. We have some sustainable components to all of that. As I mentioned in the prepared remarks, part of it, a smaller piece of this is incentive compensation, where we had higher targets this year for growth. You take that, and if you take a small amount of that, you create this virtuous cycle to where you achieve expense advantage, you take a small amount of that, and you invest in growth, you grow really high-margin business, and it's ultimately a great win for the shareholders if you do it that way.
Thank you for your answers.
Thank you. Our next question comes from the line of Michael Zaremski from Credit Suisse. Your question, please.
Hey, thanks. My first will be a follow-up to the expense efficiencies you're speaking to. I'm curious, these structural expense efficiencies, do you feel these are kind of Allstate competitive advantages, or do you feel it's a first-mover advantage and the rest of the industry is kind of moving in that direction as well over time? It feels like you've been talking about these things for a while. It seems like it came pretty fast in terms of into the income statement.
Mike, this is Tom. I think some are advantages. I think other places we're still trying to get our expenses down to where other people are. I don't think we're perfect by any measure. I would say in the claims area, which was not included in the expense ratio we're talking about, I believe we're ahead. If you look at what we're doing with QuickFoto Claim, you look at what we're doing with drones on adjusting houses, we appear to be faster and farther in integrating that into our business processes than our competitors. I say I believe because I don't go sit in the Progressive or State Farm or GEICO claims centers. When we're looking out at the industry, we think we're ahead there. There's other parts where we need to get more effective and efficient.
You've seen that at Esurance, we've brought their marketing spend down. We don't have the brand consideration for that brand yet at a point where it's as efficient and effective as the GEICO brand. They spend $1.7 billion, we spend a lot less than that. The difference is getting smaller as we spend real dollars, but we're not where they are. I would say that when you look versus the competitors, we're in the hunt, we're competing aggressively, but we're all working to try to reduce our expenses even better because we can and need to do that. One of the things we mentioned up front is we're building this integrated digital enterprise, which is about how do we use technology, data analytics, and importantly, process design to reduce the expenses across all of our brands.
That will lead to some additional changes in the future as we try to cut out expenses by leveraging stuff across our system. Anything you would all add to that?
The only thing I might say is we've mentioned advertising for Esurance. They have actually spent a lot of hard work getting their other operating costs down.
That's true.
You look, they've brought it to about half of that decline in their expenses over the last year has been other operating expenses we believe are sustainable. That's based on customer experience improvements, digitization, in addition to just the growth we've had the last 18 months in scaling. We feel good our position and the team is really focused on continuing that trend.
Okay, that's very helpful. My last question is, switching gears. In homeowners, paid claim severity is more volatile, and seems like less trendable versus the same than the auto side. Any color on how to think about what's going on with home paid claim severity, given it increased to 11.7% this quarter? Thanks.
You're right that it's more volatile, and Glenn can talk about what we've been doing in average price, which I think is important to recognize. It bounces around. Over time, over rolling 12-month periods, it should work its way out. A fire claim costs a lot. It costs a lot more than someone running into their garage door. It messes up the severities a little bit. It is seasonal, but over time, it does work its way out, and that's what you reflect into the pricing. Glenn, maybe you want to talk about how you're taking that severity and what you're doing to maintain margins.
Yeah. It's a great point Tom's making is that home, unlike auto, the variation in perils creates a lot of movement in that. We look at the overall trend. If you look at homeowner over the past six years, we've produced, on average, a 16% underwriting profit and 84 combined ratio. The last 12 months was a 98, so 2% underwriting profit. It is volatile. We've had a lot of weather in there, and we've been recognizing that in price. You can see in the year-over-year, and I always go to the average premium as opposed to the filed rates because there's a material difference between those because we have inflationary factors in. Average premium's up 5.6%, so we're definitely taking the weather patterns seriously.
We're looking at rate and what we need to do from a pricing standpoint to make sure we continue to deliver those long-term profitable margins that we've had in home.
Thank you.
Thank you. Our next question comes from the line of Ryan Tunis from Autonomous Research. Your question, please.
Hey, Dave. Good morning. I guess just taking a step back on the expense ratio, just looking at just auto, I think Allstate's always been around a 25% expense ratio company. It was about a 24 this quarter, which is clearly good. Some of your top competitors, I think, are around 20 or even a little bit lower than that. I'm curious, Tom, do you have a number in mind for what you think Allstate could get to over the next few years on the expense ratio?
Lower is better.
Sure.
Sorry. We have targets, but they're not targets that we publicly expose. We are working hard on things like integrated digital enterprise using technology, putting common processes in place across all of our brands to get that down, and we are working hard. That doesn't mean, though, Ryan, that if we see an opportunity to invest, as Glenn said, to get really attractive business, we're not going to do that. We will not be a slave to just getting that down. Our objective function is increase shareholder value, which is a combination of both ROE and growth. If we think we should invest to capture above cost of capital growth, we will do that. We get really good returns in that business. If you saw, is it possible that our investments in growth will go up? Yes.
We said they're going to go up in the second half. Does that mean we're not reducing expenses? No, we're working hard on expenses on a whole bunch of fronts.
Understood. My follow-up was on the slide 11 ROE, on some of that new stuff. First of all, just to clarify, the ROE goal will include any type of drag that's coming from the non-P&C business, like the annuities. That's something that you're going to include and have to battle against?
We'd like to get people's opinions on that as to what works for you. We know we want to give you an ROE goal. We think it should be in total because it ties to the thing. It came up earlier to the extent things change, like the accounting for annuities and you write off stuff, we have to just have a conversation with you all to say that we think it's a better measure, and it'll give you more insights into how we're doing, including buying back stock and everything else. We're not going to give you the underlying math around the goal that we do. We'll establish a long-term target, which we said this is where we can run the business. There'll be a lot of dialogue about it. This is about increasing discussion and dialogue and shifting to a better measure.
Understood. I agree the total ROE approach makes sense, presumably the easiest way to improve that total ROE would seem to me to be a separation of the annuities business, or at least the immediate annuities block. I'm just curious, are there any legal entity complications that would come with you trying to part ways with that business?
There are lots of ways to accomplish it legally. There's now a separation law that's been passed in Illinois, which gives us some additional opportunities. That may not be the first place we choose to use a separation law. However, we have some other places we'd prefer to use it first. The bigger issue on that one is finding sources of capital that believe that we do, that you should invest on a long-term basis to take care of your customers and make sure that they're protected, but that they get the right return. It's a combination of, you clearly have the complications of which company it's embedded in. You can always use reinsurance, but then you got complications of the capital stuff that Mary Jane talked about. We think that the regulatory capital required to have performance-based investments in long-dated structured settlements is just wrong.
You wouldn't invest in pension funds like that. Nobody does. The regulations don't, in fact, support you not doing that. To the extent the regulations support you being in bonds, we think that's bad for policyholders. We're just going to keep working the issue. There's no silver bullet. There was no silver bullet when we started on this in 2006. We'll just keep working it. On the ROE thing, the accounting will basically adjust to probably more than what's economic. It's not exactly where you want to get the high ROE on annuities is by writing off equity. That's what will end up happening with this accounting principle when it gets put in place.
Thanks so much.
Thank you. Our next question comes from the line of Yaron Kinar from Goldman Sachs. Your question, please.
Hey, thanks. This is Robert Cox for Yaron. The midpoint of updated underlying combined ratio guidance has two points of deterioration compared to one half 2019. You talked about rate increases earning in through homeowners in two half 2019. I was wondering if you could walk through the offsets. I know you mentioned potentially higher severity and of course, the increased investments in future growth.
Let me first, we're earning a really good return in the Property-Liability business today. The underlying combined ratio, the recorded combined ratio all generate extremely high returns. We're quite comfortable where we're at, we don't see this as waving a flag that we think profitability is going to be worse or that profitability is not going to be attractive to shareholders. Let me start there. This is a really good business with really high returns, and we like it. As it relates to the quarter-by-quarter stuff, what you're comparing is what we had versus you got to look at really the underlying combined ratio on a 12-month basis. You can't really look at it on a quarterly basis because it bounces around a lot. What we've said is that the reduction
Of the guidance from the beginning of the year, when we gave guidance, we're down now a point and a half. That's worth about half a billion dollars. That reflects the fact that frequency is down from last year, and we're assuming frequency will stay down. Severity of auto, particularly the physical damage coverage, is up versus last year, and up a little more than we thought when we did the original guidance. We factored that in, and we factored in the additional growth we're doing. We don't give the components of that by quarter. You really have to look at it annual basis, but key message, we feel really good about profitability. We like where we're at. We don't see any big changes in the market coming, whether it be frequency or severity, that we haven't anticipated that go into that number.
Okay. Thank you. Just switching to the investment portfolio. Was the extension in duration more of a strategic decision to offset the lower yield environment?
Yeah. Hey, Rob. It's John Jajewski here. As you know, we have stated that we dynamically manage our portfolio, and you can see that historically, we've done a number of things to do that. You go back a couple of years, we've built up our performance-based portfolio. From time to time, we will favor one asset class versus another. More recently, we looked at potentially slowing growth in the economy in the U.S. and around the world, coupled with higher interest rates as interest rates crept up last year. We thought that it made sense in the spirit of dynamically managing the portfolio to shift emphasis a little bit. Thankfully, we did a lot of that move to extend the duration last year, about a year between last year and the beginning of this year, and it benefited returns this year as interest rates have fallen pretty substantially.
I don't know that I would view that as really taking additional risk. It's really more balancing the portfolio more closely to our long-run objective. Going forward, who knows? We have a Federal Reserve meeting today. I think there'll be some interesting information that'll come out of that. What I can promise you is that we will work together as a team to look at where the best opportunity is across the marketplace. Just a couple of tidbits of information. A lot has been said about where our interest rate's now, and what does that mean for the performance of the portfolio going forward. I'll just remind everyone that back in 2016, the 10-year hit 1.37%. It's hovering a little bit above 2% right now. In the periods that ensued past that, we were still able to return good returns in the portfolio.
That comes from all the things that we've talked about historically. A good balance of different types of assets, whether it's market-based or performance-based and around the world, and active management. Would also point out that this year it's been an attractive year for assets year to date. Only roughly 2% of the time had both the bond market and the stock market appreciated this much if you go back 100 years. We're just taking that into consideration, and we're happy that we manage it dynamically. Maybe somewhat comforting news on that, though, is that when you look back at those periods historically, it's not as if the bottoms dropped out in markets after that. The 12 months that have ensued after these periods historically have been okay in the market.
We're watching all this information, leaning on our team internally, leaning on our experts and external managers to figure out the best way forward.
Awesome. That's really helpful. Thanks.
Thank you. Our next question comes from the line of Michael Phillips from Morgan Stanley. Your question, please.
Yeah. Hey, good morning, everybody. Thanks. My first question seems like a really basic question, I must be missing something pretty basic, so I apologize. The goal here is to grow more, you've got investments to make that happen. You talked a lot about the investments around the expense ratio. I guess what I'm missing is this quarter expense ratio was down because of lower incentive comp to agents, which sounds like incentive comp would drive growth. What am I missing there? Why would that come down?
Yeah. Michael, this is Glenn. I would say, I wouldn't lead with incentive compensation on it. I'd list that somewhere down the list of things that drove the expenses. We talked about some of the operational improvements that have been made, and that has moved expenses. We also acknowledge that a piece of it is in management incentive compensation, is part of that because of higher growth goals this year. As we've talked about in this call, we're working hard. We have been, and we're seeing some of the things come to fruition, and we'll continue to look at expense opportunities because we consider it a virtuous cycle. You reduce expense, you invest a portion of that reduction in growth, you grow really high margin business, and that's our target.
From a philosophy standpoint, we should do better every year. Like, the fact we raised the targets, and their advancement is not yet at those targets, so they're not getting paid on it, that's like, okay. They're not disincentivized. They're hustling to get the higher target. What incentives is give them good targets, balanced targets, give them the resources to get it done. This is not as direct a mainline as, "Dude's not paying me, so I'm not going to sell.
Okay, thanks for that. I guess, on the severity, it's been rising a bit and still kind of is. Do you see any impact there from, and I think this has been asked before, but maybe just any updates here, any impacts from tariffs that may be impacting the cost of claims?
This is Glenn. Michael, indirect, it can be in there. We've seen a trend of increasing parts prices. You look at tariffs, I mean, 60% of glass and more than half of replacement sheet metal parts do generate out of China. You get a significant amount of impact in that space. Parts prices have been rising for the last 10 years at a much faster rate than the price of cars. We've talked about that in past calls because you start getting into a math exercise where if the parts prices accelerate faster than the price of the car, therefore, repair accelerates faster than the car, and more cars reach that capitation level of it's not economic to repair them, and you have more total losses. We continue to see that trend.
As we look at the past 12 months, I know this quarter was a bigger number, and some of that's the year-over-year comparison, not reflective of the absolute dollars as they move. We've seen essentially a 6-ish% trend in property damage severity compared to a long-term trend of 4%. As we talk about our numbers and including in the guidance that we just dropped by a point and a half, we have factored in what we believe is going to happen in the auto physical damage space going forward. All the numbers are in there financially in terms of what you should expect to see.
Jonathan, we'll take one more question.
Certainly. Our final question comes from the line of Paul Newsome from Sandler O'Neill. Your question please.
I guess, the other piece I wanted to ask-
Hey, Paul, could you speak up? We can't hear you.
My apologies. I wanted to maybe beat the expense ratio horse just one more time. I was hoping you could look out further into what sorts of pieces you'd be looking for to moderate perspectively, in terms of the expenses. Is any sort of commission levels involved in that, or is it all just operating expenses?
Well, Paul, we don't give the components out, but in total, our customers want to pay less to get more. What we have to do is both figure out how to use less money, also how to improve the customer experience. We are, for example, Glenn has an effort going to build some integrated service capabilities where we will move work out of agencies into centralized centers, which, eventually may even actually be not needed anymore because once we centralize them, we can figure out how to redesign processes to make them not needed as much as we've done when Glenn was talking about getting rid of the 20% of the inquiries. That will lower costs.
At the same time, we're investing in new technology for the agencies called Allstate Advisor Pro, which enables them to have a much more fulsome, broad conversation with customers about their needs and what kind of protection they have. It's a question of managing both the expenses down and the value. Glenn, anything you would add? Do you want to add anything on integrated service, or?
I guess the point of detail I'll put on that, if you think about our system, the value that we provide to customers, we think is a really big differentiator as trusted advisors. We have agents across the country in people's hometowns that are providing them great advice on their insurance. That's the good news. The opportunity is that there's some inefficiency in providing the service in a decentralized way like that. When you aggregate some of the transactional service components that customers don't value as much as that advice, and you can do it at scale, you can take meaningful cost out of that system. As Tom described, I think that's a great opportunity as we move forward.
My follow-up was about maybe any updated thoughts you have on M&A and, I think you obviously expanding the service businesses. There's some talk of expanding the commercial businesses. Any thoughts of updated in M&A?
I would say it's consistent with what we talked about first. We look at stuff all the time. We're kind of picky. We have to be a better owner. Like when we look at companies, we're like, is there a reason that we add value and we make this a better company? We believe that the partnership we've put together with SquareTrade has helped lead to that dramatic growth. We believe the partnership that we're building with the InfoArmor team will have great growth because we're going to start selling that stuff through Allstate Benefits. It's low-cost distribution. We got to figure out how we get the Allstate name on it. There's a lot of things we can, it's the middle of those ovals. That's what really the acquisitions have to do.
We don't have anything specific on the list today that isn't consistent with the strategies that you had and you just talked about. As it comes up, you'll find us to be prudent, thoughtful, and then the other things we will do is as we've done with SquareTrade and InfoArmor, say, "Here's our measures for success." We acquired the company. Here's the three things we think we need to do with it. About every six to nine months, we go through that with you and say, "Here's how we're doing." It's about being strategic, deploying shareholders' capital well, and then being fully transparent.
Great. Thank you. Congratulations on the quarter.
Thank you. Our strategy is twofold, grow market share and personal property-liability. We're hard at work in that. Grow our other protection products, which we've had great success on this quarter. At the same time, making sure we deliver what we need to do on our annual operating priorities. Thank you. We'll continue to work hard on shareholders' behalf.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.